(August 2019)
This coverage part is complete only when attached to the CO 1000– Commercial Output Program–Property Coverage Part because the following sections of the property coverage part are referenced in the income coverage part:
The CO 1050 and CO 1051–Schedules of Coverages used with the property coverage part are also used with Income Coverage.
Related Article: Commercial Output Program Declarations and Schedules of Coverages
Three coverages are available within the following four coverage options:
Earnings include rents when the option for earnings, rents, and extra expense is selected. However, earnings means only rents when the option for only rents and extra expense is selected.
This coverage protects against the named insured losing income because its business has been interrupted by a direct physical loss. The loss or damage must be to covered property and due to a covered peril. The damage must occur at a covered location or within 1,000 feet of a covered location. Property within that radius may be in the open or inside of a vehicle. When the named insured occupies, but does not own, a building, “covered location” includes access to its portion of the building and its business personal property situated either within 1,000 feet of the covered location in the open or within a vehicle.
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Example: Minx’s Office Network is located on the 11th
floor of a 20-story building. A fire occurs in the building’s lobby and
access to it and the lobby’s elevators are denied during the two weeks
required to make repairs. Because the elevators are the only access to Minx's
premises, coverage applies for Minx's income loss even though it did not
incur a direct physical loss. |
Coverage applies during the restoration period which begins when the interruption occurs and ends when operations actually resume or should have resumed. The restoration period is defined in the Definitions section of the property coverage part.
Related Article: CO 1000–AAIS Commercial Output Program – Property Coverage Part Analysis
Note: The interruption is not covered if it is voluntary. It is covered only when the interruption is deemed necessary.
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Example: A small fire occurred at Patty’s
warehouse. Scenario 1: With a minimal amount of effort, Patty could have continued
operations. However, she decided it was a good excuse to give all of her
employees a week off without pay. This income loss would not be covered. Scenario 2: The fire occurred in
the central processing area of the warehouse. The most efficient way to
repair the damaged property and clean up the warehouse was to close the
warehouse for a week. This income loss would be covered. |
Coverage applies to earnings. Earnings is composed of two separate components that are determined and then added together. The first component is the loss of net income. Net income is the net profit or loss prior to income tax that would have been earned during the period of restoration. The net income can be either negative or positive.
The second component is the cost of expenses that continue during the period of restoration. This is important because during periods when operations are conducted at a loss, certain expenses continue, including payroll expense, utility payments, and other contractual obligations.
The two components are added together to develop the amount of earnings covered. If the result is less than zero, the insurance company does not pay anything.
Related Court Case: Business Interruption Insurance Held Not To Indemnify When Net Loss Exceeded Operating Expenses
When the named insured is a manufacturer a third component is added. The sales value of any goods that would have been produced during the period of restoration must be added to first component, net income.
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Example:
Quarrelsome Manufacturing, Inc. operates at a loss until the fourth quarter
each year because it is gearing up for holiday sales. The loss occurs in May
and, thanks to a lot of expedited payments, Quarrelsome is back in operation
by August. The net income during the restoration period is a loss of $40,000.
The sales value of goods that would have been produced is a positive $25,000
and the continuing expenses were $20,000. The total earnings loss is ($25,000
– 40,000) + $20,000 = $5,000. |
Extra expenses incurred during the period of restoration are covered if
they are necessary but would not have been incurred if not for the covered direct
physical loss. Extra expenses incurred to avoid or reduce the interruption of
business so that operations can continue at either the covered location or at a
substitute location are also covered. Relocation expenses and the costs to
operate at a substitute location are considered extra expense. If operations
must be stopped, coverage applies to those extra expenses incurred to reduce
the amount of the time the operations are interrupted.
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Example: Quarrelsome is adamant that its business
will not shut down because it must satisfy contracts it has with a November
delivery date. An alternative building is located, and all employees are
asked to report to work. Quarrelsome finds all needed equipment and contacts
suppliers and pays for expedited delivery. He posts large signs around the
damaged location providing directions to the new location. Quarrelsome adds
extra staff to stay in contact with existing customers to make sure all
contracts remain in place. Quarrelsome never ceases operations but does incur many extra expenses
to keep going. All of the expenses are covered provided they are considered
reasonable and are within its limit of insurance. |
Extra expenses that are incurred to repair, replace, or restore any property are covered but only for up to the amount they reduce the amount of the loss of earnings claim. Similarly, extra expenses that are incurred to research, replace, or restore information on damaged valuable papers or data records are covered but for no more than those extra expenses reduce the income loss.
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Example: Quarrelsome hired researchers to recreate the valuable
papers and records. Having these records will assist them with the workflow
and manufacturing processes. These recreated records mean that the new
operation is able to quickly get going and reduce the amount of income loss
by $12,000. Quarrelsome paid $10,000 for the researchers so this extra
expense is paid in full. |
All of the exclusions and limitations in the Coverage Property Part apply to this coverage. In addition to those, the following apply for only this coverage:
Loss or damage to stock the named insured manufactured is not covered if it is ready to sell or ship. The time needed to reproduce such stock is also not covered. However, finished stock awaiting sale at an owned retail location is not excluded.
Note: CO 1000–Commercial Output program–Property Coverage Part, Manufactured Stock Valuation is based on the net selling price of manufactured goods. That valuation basis offsets this exclusion. Having this exclusion in place prevents duplication of coverage.
If the termination, suspension, or lapse of lease arrangements, licenses, contracts, or orders increases the length of time for a business to return to operation following a covered, there is no coverage for that increased time period. However, if the suspension, lapse, or cancellation is a direct result of the interruption of the insured's business, that increased time period is covered. Once the restoration period ends so does any coverage granted in this section.
Any increase in the time period in which the
business is not operating that is the result of strikers or other persons at a
covered location interfering with the rebuilding or resumption of operations efforts
is not covered.
Note: This applies only to such interference at
the covered location. There is no mention about coverage exclusion if the
interference takes place elsewhere and hampers the rebuilding.
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Example: Minx Office Network looks forward to getting back to its offices and resuming operations. However, contract negotiations between the city and the sanitation workers union break down. Scenario 1: The union workers picket Minx's building. Union contractors refuse to cross the picket line and the final repairs to the lobby are delayed by an extra week. Minx Office Network is not paid for the week lost as a result of the strike. Scenario
2: The union workers picket Minx’s contractor’s location. Union contractors
refuse to cross the picket line to pick up their needed tools and
contractor’s equipment. Minz Office Network is paid because the strike is not
at its location. |
These extensions are listed on CO 1050 and CO 1051–Schedules of Coverages. Each has a limit or limitation that may also be displayed on the Schedule of Coverages. If a different limit or limitation appears on the Schedule of Coverages, it supersedes and replaces the limit or limitation shown in this coverage part. These extensions are part of the Income Coverage limit and not in addition to it.
When a civil authority will not permit access
to a covered location or a dependent property location, there is both earnings
and extra expenses coverage subject to the following conditions:
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Example: Wildfires threaten Quartro’s business district and the
fire marshal orders all buildings evacuated. Ling Manufacturing initially
resists the evacuation order but after three days, capitulates and leaves.
Ling's earnings loss during the evacuation period is covered, as is the extra
expense it incurs when it rents space in an adjacent town to continue its
operations. Ling has only 27 days of coverage because it chose to not leave
immediately. |
Earnings coverage extends for an additional 90 days after business operations resume or until the date the insured's operations reach the same level that existed before the loss occurred. The length of time can be increased on the Schedule of Coverages.
Note: This extension is important. Typically, income coverage ends when business operations resume but most businesses do not immediately operate at their pre-loss income level. This extension provides some breathing room in which the business operations can reach the pre-loss level.
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Example: Michel’s Restaurant was closed for two months because of
damage caused by a wind loss. When the restaurant reopened, Michel discovered
that many of his regular customers were going to other restaurants. It took
two months of advertising, coupons, and dinner specials to entice the
regulars to return. This income coverage extension made up the difference
between the net income before and after the loss for those two months. |
The six Supplemental Income Coverages apply separately to each insured location. Each coverage is subject to the limit in this coverage form. This limit may be superseded by the limit displayed for it on the Schedule of Coverages. All limits are separate from the applicable Income Coverage limit and not part of it. It is the only limit available for the supplemental coverage.
When computer hacking or a virus causes a direct physical loss or damage to computers or the named insured’s computer network or its website, and a loss of earnings or extra expense occurs because of it, there is coverage. There is also coverage when the virus or hacking results in access to the named insured’s website, computer, or network being denied.
The following limit the coverage provided when data records or proprietary programs:
The waiting period for the insured's loss of earnings under this supplemental coverage is 12 hours after the direct physical loss or damage to computers, networks, or web sites. The waiting period can be changed on the schedule of coverage. Extra expense coverage is not subject to a waiting period.
The limit of insurance is $25,000 in a single occurrence. However, there is an aggregate limit of $75,000 applying to each 12-month policy period.
If the named insured incurs a business interruption because of a covered loss at a dependent location, earnings and extra expense coverage is provided for up to $100,000 in a single occurrence.
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Example: Here & Gone is a discount gift retail operation.
First Warehouse provides over 70% of the goods H & G sells. A severe
windstorm destroys all the stock at First Warehouse. H & G experiences a
dramatic reduction in business because its supplier is shut down. Here &
Gone’s loss of earnings is covered by this supplemental income coverage. |
Note: CO 1204–Income Coverage From
Dependent Locations–Separate Limits and CO
1298–Income Coverage from Dependent Domestic and Foreign Locations endorsements
are available to specifically schedule dependent coverage locations and limits
specific to them. When they are used this supplemental coverage is replaced.
Earnings and extra expenses are covered when the business is interrupted due to direct physical damage to an off premises utility covered property. The utility must not be owned by the named insured and it must be off premises. The interruption must be caused by a covered peril. The utility services can be power, gas, water, or telecommunications services. The coverage includes damage to overhead transmission lines unless checked as excluded on the Schedule of Coverages. The waiting period for the insured's loss of earnings is 12 hours after the direct physical loss or damage to the property owned by the supplier, unless a different period of time is entered on the Schedule of Coverages. No waiting period applies to extra expenses incurred by the insured.
The limit of insurance is $10,000 in any one occurrence.
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Example: A truck hits a transformer, resulting in the loss of all
electricity at Colby’s Restaurant. The accident occurs at 4:00 a.m. two
blocks away from the restaurant. The electric utility works as quickly as it
can to repair the damage, but it takes 24 hours to restore full electric
power to Colby's. Colby’s receives payment for its loss of income beginning
at 4:00 p.m., 12 hours after the time of the accident. |
If the period of restoration is increased because of the enforcement of any law or ordinance that requires the removal of pollutants from land or water at a covered location, this coverage applies subject to the following:
There is no extension of coverage if the increased time is caused by enforcement of any law or ordinance requiring the named insured to test for or record the presence of pollutants unless the testing is directly related to the extraction of pollutants from land or water.
The most paid in a single occurrence or at a single location is $25,000.
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Example: A fire occurs at Gleeful
Motors. Because of the fire, various oil and other products enter the soil
and the retention pond behind the business. Local ordinances hold businesses
responsible for cleaning up any pollutant spills. The cleanup extends the restoration
period by 2 weeks. There is coverage for the two weeks but for not more than
$25,000. Testing is required to verify the cleanup is complete. This extends
the period of restoration by another three days. Coverage continues to apply
but only if the total earning and extra expense pollutant loss is less than
$25,000. |
If the named insured is assessed contract penalties because it cannot complete a project or fill an order in the manner prescribed in a contract, earnings coverage is extended to pay that penalty. The reason for the penalty must be the direct result of physical loss or damage to covered property caused by a covered peril at a covered location.
The most paid in a single occurrence is $25,000. However, the most paid for all losses over a 12-month period is $100,000.
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Example: Moyer Tire has a contract with Ready Truckers to supply
Ready with tires within 12 hours of it placing an order. Moyer incurs a
$1,000 penalty each time it fails to meet the terms of the contract. A fire
at Moyer keeps it out of business for four weeks and it fails to meet the
terms of the contract 10 separate times during this period. This Supplemental
Income Coverage covers the total of $10,000 in penalties incurred by Moyer. |
If direct physical loss to covered property in transit, on exhibition or in the possession of sales representatives is caused by a covered peril and causes an earnings loss, there is coverage. Coverage applies only during the restoration period and is limited to no more than $10,000 from a single occurrence.
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Example: Pam normally gets 25% of her orders during the
Beekeepers Association annual meeting. Instead of transporting the booth and
exhibition material on her own, Pam hires a trucking firm to do it for her.
The transporting vehicle is stolen, Pam has nothing to exhibit, and she
experiences a significant loss of earnings. This Supplemental Income Coverage
provides $10,000 to apply to her loss of earnings. |
The property coverage part, What Must Be Done In Case of Loss condition applies to the Income Coverage Part. The following additional condition applies only to this coverage part.
The named insured must resume all or part of its business operations as soon as possible after a covered loss if it intends to continue in business.
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Example: Heavy February
snow causes the roof on Mavis' factory to collapse. The factory is in |
The following three areas are considered when determining the value of an earning loss:
Note: Earnings losses are based on projections, estimates and certain assumptions. As a result, if the loss is relatively short in duration, the named insured and the insurance company usually agree on the value of the loss fairly quickly. On the other hand, losses of greater duration can become contentious, especially if the business is one that experiences seasonality or volatility.
The insurance company expects everything will be done to resume operations as quickly as possible. If the named insured proceeds slowly, or does not resume operations at all, the insurance company pays only the income losses for the amount of time it estimates should have been needed for the business to resume.
Note: This is another potential area of debate between the insured and the insurance company as the claim is settled.
Related Court Case: Trade Center Firm's Business Measured By Resumption There
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Example: Continuing the
example above, Mavis went to Florida instead of resuming operations immediately
but once she returned, she worked diligently. The roof was replaced, and the
plant was in full operation on July 1. The insurance company maintained that
operations could have resumed on May 1 if Mavis had stayed in town, attended
to business, and not gone to |
If the income loss is a dependent location loss, the earnings are reduced by the amount that could have been saved by resuming operations using other customer or supplier sources.
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Example: Owen’s Store receives 60% of its stock from Mavis’
factory. Because his supplies could not be replenished during the five months
Mavis' factory was shut down, Owen incurs a $15,000 dependent location income
loss. However, Owen's insurance company knows he could have obtained the
needed supplies from any of three other sources had he chosen to do so. As a
result, the insurance company reduces the dependent location loss payment to
Owen to $5,000 because Owen did not choose to obtain the stock he needed from
the other sources. |
The insurance company considers the salvage value of any property purchased for temporary use during the restoration period and deducts its value from the amount of loss determined for extra expense when evaluating the extra expenses incurred by the insured.
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Example: Polly’s Drug Store purchased a trailer to use as a
temporary pharmacy so she could continue serving her pharmacy customers after
a covered loss. The total extra expense loss was $50,000 but the $20,000
salvage value of the trailer was deducted from that amount. Polly was paid
only $30,000. |
The property coverage part, How Much We Pay condition applies to the Income Coverage Part. In addition, the most the insurance company will pay for the combination of earnings, extra expense, and rents arising from a single loss is the Income Coverage limit of insurance on the Schedule of Coverages.
The property coverage part, Loss Payment condition applies to the Income Coverage Part.
The property coverage part, Other Conditions applies to the Income Coverage Part. The following additional condition applies to only this coverage part.
If the named insured and the insurance company cannot agree on the amount of loss, net income, payroll expense, or operating expenses, either party can demand that the amounts be determined by using the appraisal condition described in the property coverage part, Other Conditions, Appraisal.